[Analysis] Regulatory Changes for Indian Listed Entities – SEBI’s Overhaul for Market Dynamics and Board Effectiveness

Table of Contents

1. Dynamic Market Cap Regulations
2. Revamping Director’s Norms: Streamlining Committee Positions for Enhanced Board Effectiveness
3. Committee Proposes Extended Window for Key Managerial Personnel Appointments
4. ICDR Amendment Proposes Inclusion of Convertible Securities in Promoters’ Contribution
5. Empowering Entrepreneurs: ICDR Amendment Proposes Flexibility in Promoters’ Contribution
6. Proposal for Adaptive ICDR Amendments in Unforeseen Circumstances
7. Conclusion

SEBI proposes major regulatory changes for Indian-listed entities for a dynamic market and board effectiveness

On Jan 11, 2024, the SEBI issued a consultation paper seeking comments from the stakeholders on interim recommendations of the Expert Committee for facilitating ease of doing business for listed entities and harmonization of the provisions of the ICDR and LODR norms. This Report has been presented to the SEBI for taking these interim recommendations forward.

The Expert Committee has proposed the key amendments relating to the applicability of the regulations based on market capitalization, limit of membership and chairmanship of committees for a director, timeline for prior intimation of board meetings, Non-individual shareholders to be permitted to contribute towards Minimum Promoters’ Contribution, etc. under LODR and ICDR norms. Let’s check out the key highlights of the consultation papers:

1. Dynamic Market Cap Regulations

Existing norms

The provisions which become applicable to a listed entity based on market capitalization criteria (ranking) shall continue to apply even if the market capitalization of the listed entity falls and remains below the applicability threshold.

Proposed amendment

Now, it has been proposed that applicability of the regulations should not be based on a single day’s market capitalization (currently calculated as on 31st March). There should be a sunset clause to reduce the burden on companies whose market capitalization falls and continues to remain below the threshold.

Rationale

The daily fluctuations in a listed entity’s market capitalization make a single-day assessment less representative of its true market size and ranking among peers. Proposing an average over a reasonable period, such as 6 months, for a more accurate reflection.

2. Revamping Director’s Norms: Streamlining Committee Positions for Enhanced Board Effectiveness

Existing norms

As per regulation 26(1) of the LODR, a director shall not be a member in more than 10 committees or act as chairperson of more than 5 committees across all listed entities.
For the purpose of calculation, chairpersonship and membership of Audit Committee and the Stakeholders’ Relationship Committee shall be considered across all public limited companies including unlisted public companies, and positions in private limited companies, foreign companies, high-value debt listed entities and section 8 companies shall be excluded.

Proposed amendment

Restrict the application of regulation 26(1) to only equity-listed entities. Further, consider only membership and chairmanship of the Audit Committee. Also, aligning with the maximum directorships allowed under regulation 17A, propose a director’s membership in a maximum of 7 Audit Committees for listed entities, omitting the committee membership limit from regulation 26(1).

Further, it has also proposed to retain the limit of chairing not more than 5 committees (now restricted to chairing a maximum of 5 Audit Committees) across listed entities.

Rationale

The exclusion of the Stakeholders Relationship Committee from the overall limit calculation is proposed to encourage more independent directors to participate in such committees, addressing the observed reluctance to take up positions due to limit constraints. This approach aims to strike a balance between ensuring director commitment and fostering effective utilization of expertise in board committees.

3. Committee Proposes Extended Window for Key Managerial Personnel Appointments

Existing norms

Any vacancy in the office of Key Managerial Personnel of a listed entity has to be filled up at the earliest and in any case not later than 3 months from the date of such vacancy.

Proposed amendment

The Committee suggests extending the time limit for filling key managerial personnel vacancies, requiring regulatory or government approvals, from 3 to a maximum of 6 months under LODR Regulations 26A(1) & (2) of LODR Regulations. Emphasizes the importance of initiating approval processes promptly for timely compliance by listed entities.

Rationale

This balanced approach by making the total timeline for filling Key Managerial Personnel vacancies 6 months instead of the current 3 months, aims to ensure compliance without compromising the interests of listed entities and shareholders.

4. ICDR Amendment Proposes Inclusion of Convertible Securities in Promoters’ Contribution

Existing norms

As per the ICDR norms, Regulation 14 mandates a 20% contribution from promoters for the post-offer paid-up equity share capital. Currently, Regulation 15 excludes equity shares from convertible securities converted within a year before the DRHP filing from the minimum promoters’ contribution.

Further, Regulation 8 allows an offer for the sale of equity shares converted from fully paid-up convertible securities held for at least one year before DRHP filing, aligning with the capital’s existence for a minimum period.

Proposed amendment

Equity shares resulting from the conversion of fully paid-up, compulsorily convertible securities, held for a minimum of one year before filing the DRHP, should qualify for the minimum promoters’ contribution.

This aligns with the rationale that the capital (represented by convertible securities) existed and was held for at least one year before the DRHP filing. The conversion of compulsorily convertible securities into equity shares should occur before submitting the red herring prospectus.

Rationale

The proposed amendment aims to align ICDR norms with a more nuanced approach, allowing equity shares from the conversion of fully paid-up, compulsorily convertible securities held for a minimum of one year before DRHP filing to be eligible for the minimum promoters’ contribution.

5. Empowering Entrepreneurs: ICDR Amendment Proposes Flexibility in Promoters’ Contribution

Existing norms

Regulation 14 of ICDR Regulations mandates a 20% minimum promoters’ contribution of post-offer paid-up equity share capital on a fully diluted basis. If the promoter’s share falls below 20%, specified QIBs can contribute to the shortfall, capped at 10%, without being classified as promoters.

QIBs include alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions or insurance companies registered with the Insurance Regulatory and Development Authority of India.

Proposed amendment

Observing that entrepreneurs’ companies often undergo multiple funding rounds before listing, it was noted that their promoter holdings might fall below the 20% minimum required for promoters’ contributions. While the ICDR allows certain investors to bridge this shortfall, there is a call for increased flexibility.

It has been proposed to allow any non-individual shareholder holding 5% or more of post-offer equity share capital to contribute to the minimum promoters’ contribution shortfall, capped at the existing 10%, without being designated as a promoter.

Rationale

The proposed amendment seeks to address the challenge faced by entrepreneurs whose promoter holdings may fall below the 20% minimum required for promoters’ contributions due to multiple funding rounds before listing. This change aims to adapt ICDR norms to the evolving dynamics of fundraising in entrepreneurial ventures, promoting a more inclusive and adaptable regulatory framework.

6. Proposal for Adaptive ICDR Amendments in Unforeseen Circumstances

Existing norms

Currently, the ICDR permits issuer companies to, for reasons recorded in writing, extend the bidding period disclosed in the offer document for a minimum period of three working days in case of any force majeure events, banking strike or similar ccircumstances.

Proposed amendment

Mandating an extension of the bidding period by a minimum of three working days in such force majeure scenarios would result in locking substantial funds for additional time. Thus, it may not be a fit scenario to mandate an extension by minimum three working days in force majeure events/banking strike.

Accordingly, it is recommended that Issuer companies should be permitted to extend the issue period, depending on the circumstances, by one working day in case of force majeure events, banking strikes or similar circumstances.

Rationale

The recommendation proposes to align the timeline with the specific circumstances and promote a more adaptable regulatory framework.

7. Conclusion

In conclusion, the proposed regulatory changes by the SEBI, based on the interim recommendations of the Expert Committee, reflect a comprehensive effort to enhance the ease of doing business for listed entities in India. The amendments target various aspects, including market capitalization regulations, directorial norms, timelines for key managerial personnel appointments, and flexibility in promoters’ contributions.
These proposed changes demonstrate a commitment to adapt and streamline regulations, fostering a dynamic market environment while ensuring effective corporate governance.